Question

Mary is the production manager of the potato chip division. She gets bonus equal to 10% of her base salary if the division meets its target profit. She realized that the preliminary profit figures for the division is $10,000 below the target profit. She is considering changing the estimated percentage completion with respect to materials and conversion in ending work in process inventory of the final processing department to increase the profit. Does Mary want the percentage completion to be increased or decreased? Briefly explain your reasoning. Do you think Mary should change the percentage completion? Why or why not?       

Answer 1

Mary wants the percentage completion to be increased.

Reason: Mary needs to meets its target profit to get the bonus equal to 10%. But she finds out that preliminary profits are short of target profit by $10000. In such case Mary needs to manipulate some figures to get the desired profit. However, Mary cannot manipulate the factual figures such as Production Input and Output figures. So what can be manipulated is estimated figures such as closing inventory which is done by estimating percentage completion of the product. If mary somehow increase the completion percentage of the ending work in process inventory of the final processing department, then it will increase the value of the ending inventory. This will result in decrease in cost of goods produced and ultimate resultant effect will be shown as in increase in profit. This will make mary to achieve desired profit of division and to earn bonus equal to 10%.

Mary should not change the percentage Completion.

Reason: Mary is the production manager of the potato chip division. She cannot use his authority to take some personal gain and benefits. Also changing the estimated percentage completion with respect to materials and conversion in ending work in process inventory of the final processing department will inflate the closing stock and ultimately inflate the profit. This will not result in true and fair view of financial statements. Also if the management identifies the inflation of profit percentage by Mary than may mary action against her such as demotion or penalty or may be fired from the job. So mary should not change the percentage completion.